Mid­dle class rep­re­sents a big op­por­tu­nity that AIA China, led by John Cai, will ex­ploit by up­ping in­vest­ments

AIA Group Ltd, the world’s se­cond-largest life in­surer by mar­ket value, will in­crease in­vest­ment in China as it sees a long-term op­por­tu­nity in the grow­ing de­mand for pro­tec­tion from the coun­try’s swelling mid­dle-class con­sumers, the in­surer’s top coun­try ex­ec­u­tive said.

In a re­cent in­ter­view with China Daily, John Cai, chief ex­ec­u­tive of­fi­cer of AIA China, said the coun­try’s long-term busi­ness prospects are bright de­spite the cur­rent choppy stock and cur­rency mar­kets and slower eco­nomic growth, which are squeez­ing the in­dus­try’s prof­its.

“The po­ten­tial of the Chi­nese con­sumers and the bur­geon­ing mid­dle class as well as their ris­ing in­come will mean greater de­mand for pro­tec­tion and in­sur­ance prod­ucts,” Cai said. “We will in­crease the in­vest­ment in China and we have pre­pared enough cap­i­tal for our ex­pan­sion in China and the train­ing of lo­cal em­ploy­ees.”

AIA’s op­ti­mism stems from the ex­pec­ta­tion that over­all value of in­sur­ance pre­mi­ums in China will reach 5 tril­lion yuan ($750 bil­lion) by 2020. Also, China is poised to sur­pass Ja­pan this year to be the world’s se­cond-largest in­sur­ance mar­ket.

Cai said AIA China will con­tinue to hire in­sur­ance agents whose num­ber more than dou­bled to 30,000 in the past five years.

Rid­ing the surg­ing de­mand for life in­sur­ance prod­ucts in China, AIA’s new busi­ness value, a mea­sure of ex­pected profit from new poli­cies, rose 37 per­cent on a con­stant ex­change rate ba­sis to $1.26 bil­lion in the first half of this year.

New­busi­ness value in­Hong Kong soared by 60 per­cent to $537 mil­lion while the new busi­ness value in the Chi­nese main­land jumped by 56 per­cent to $278 mil­lion, ac­cord­ing to the in­surer’s fi­nan­cial re­port.

Over­all, its op­er­at­ing profit rose by 14 per­cent in the first half while net profit, which in­cludes on-pa­per losses from eq­uity in­vest­ments, de­clined by 2 per­cent due to volatil­ity in the stock and cur­rency mar­kets.

“The in­dus­try’s de­clin­ing profit is mainly due to the weak mar­kets. But in the long run, the de­mand will con­tinue to grow and the in­dus­try still has very ex­cit­ing prospects,” Cai said.

The Hong Kong-based in­surer’s main­land unit head said that one of the chal­lenges is how to im­prove and op­ti­mize the com­pany’s in­vest­ment port­fo­lio in an en­vi­ron­ment of low in­ter­est rates and slower eco­nomic growth.

The in­tense price com­pe­ti­tion and the short­age of John Cai,

We will in­crease the in­vest­ment in China and we have pre­pared enough cap­i­tal ... ”

in­vestable as­sets have prompted many in­sur­ers in China to in­vest heav­ily in high-risk as­sets such as high-yield bonds and small-cap stocks.

To fund such risky in­vest­ments, in­sur­ers tend to sell to in­di­vid­ual con­sumers and cor­po­rate clients high-yield universal life prod­ucts that usu­ally prom­ise a re­turn as high as 6 to 8 per­cent.

Ac­cord­ing to of­fi­cial data, in­dus­try pre­mi­ums from universal life prod­ucts grew dra­mat­i­callyby147.3per­cent in the first half of this year. The surge has caught the reg­u­la­tor’s at­ten­tion. TheChina In­sur­ance Reg­u­la­tory Com­mis­sion has tight­ened reg­u­la­tions on life in­sur­ance prod­ucts to curb spec­u­la­tive ac­tiv­i­ties.

“The short­age of in­vestable as­sets­may prompt some firms to en­gage in risky and spec­u­la­tive in­vest­ments. But as­set qual­ity is cru­cial and the risk man­age­ment should al­ways be the pri­or­ity of an in­sur­ance firm,” Cai said.

He also noted that adapt­ing to the new cap­i­tal re­quire­ment un­der “Sol­vency II” regime, the risk-ori­ented reg­u­la­tory scheme im­ple­mented since this year, is another chal­lenge for in­sur­ers.

Cai has more than 20 years’ ex­pe­ri­ence in the in­sur­ance in­dus­try; he has been AIA’s China CEO since 2009.

He at­tended the B20 Sum­mit in Hangzhou ear­lier this month, and said he was en­cour­aged by Chi­nese Pres­i­dent Xi Jin­ping’s mes­sage that the coun­try will con­tinue to open up its mar­kets to for­eign com­pa­nies.